Trends in the Car Industry - Assignment Example

Car Industry Analysis Trends in the Industry Car industry is not only capital intensive but labor also plays important. Despite rise in the use of robots in the industry, the cost of labor is still considerable. Advertising and market research now also make a big part of the cost of the car manufacturers as the companies now try to understand and woo the consumers to their brand because main source of revenues for automobile companies is consumer sales. Therefore, consumers and their changing demands for the industry becomes an important consideration. Companies now have to give more attention to varying consumer needs. Customer Orientation: Factors like customer services, warranties etc become important. Financing is another new dimension to the whole situation as car companies are trying to make a profit on financing by offering lower financial rates than financial institutions. Most giant automobile companies have expanded into providing financial services to car buyers. Leasing has benefited both consumer and manufacturer. With leasing option consumers find cars more affordable and thus they increase the overall demand for cars. However, if leasing is not done at the right value of the vehicles at the end of the lease then it could eventually be a loss for the company. Technological & Environmental Concerns: Technological changes and advances have also become a key factor in the industry. Advances in aerodynamics, brake assistance, adaptive speed control and global navigation and satellite tracking system etc require a proactive approach by the industry with regard to technology. Increasing awareness of environmental issues has also forced the industry to look into cars with alternative fuel options. Fuel Efficiency has also become a key selling element in the industry. Hybrid cars can be considered a step in this direction with the use of smaller, more-powerful and easily recharged lithium ion batteries for hybrid cars. Such batteries would be able to help in reducing the oil consumption and thus helping in reducing the oil demand. Ethanol, Fuel Cells and Hydrogen Power cars are therefore coming to the limelight putting a lot of emphasis on environment. Ecommerce: Internet like every business has also affected the car business as consumers can make informed decisions before making an automobile purchase. There sites available that support deliver competing bids for cars, insurance and financing in a way that lowers costs and improves satisfaction among consumers. Not only Internet revolution has helped customers but e-commerce has helped manufacturers in managing their supply chains and controlling their inventories. Capacity Issues: The industry has also been facing problems of capacity. Plant capacity throughout the world has resulted in an industry that is capable of making more cars for fewer customers meaning that supply exceeds the demand for cars. This sustenance of capacity by creating parallel demand for cars is a challenge for the industry. Dealerships: Dealership of cars is another area which has seen major changes over the years. Now, nationwide holding companies have got their hands on the best dealers in major markets. Even national chains have acquired the used car business. These changes now affect the way car manufacturers see the delivery of their end products. Situation of Car Parts Firms: Suppliers have of car parts have an important role to play in the industry. Dash boards, seats, tires, etc. are provided by Original Equipment Manufacturers. Many car parts manufacturing firms in UK are losing ground to cheaper rivals in Eastern Europe and the Far East. Some firms could even get closed, without the upgrade in their setup. There are companies in the region which are investing in their future by getting new equipment to help keep going in the face of growing foreign competition for example, some firms got ability to mould larger plastic car parts with its new machinery. The competition from Eastern Europe and the Far East is very disturbing for the manufacturing industry. A new and interesting trend is the merger of Car and parts manufacturers. On the other hand the traditional in-house manufacturing & component design is now being outsourced. Situation in US Market US market was traditionally dominated by the big three companies namely, General Motors, Daimler Chrysler & Ford Motor Co. Many large US automakers have been hit by issues ranging from changing consumer tastes to rising costs for raw materials. There are firms that have announced plant closings and layoffs. Big names like GM and Ford have also been struggling to turn around their unprofitable North American vehicle operations. On the other hand Japanese firms like Toyota and Honda have made further inroads into the US market. "Some industry watchers say American workers aren't competitive, but foreign carmakers are hiring them faster than ever (and picking up political goodwill, to boot). In addition to Toyota's new pickup plant in San Antonio, which opens this year, the surging auto giant will open an SUV plant in Ontario in 2008. Hyundai Motor Corp. will gear up its Montgomery (Ala.) plant, with production expected to rise to 240,000 vehicles this year from 93,000 last year. And Hyundai affiliate Kia Motors Corp. plans to build a 300,000-capacity plant at a site nearby. 'Car production is changing hands, and it's going up,' says CSM Vice-President Michael Robinet" ('The Good News about America's Auto Industry', 2006). USA market is also expected to grow in the coming years and gain momentum. The market is showing positive signs of growth. Most companies are now banking on the US markets to pick up again. European Market Scenario In the European market there are few vehicle manufacturing firms. DaimlerChrysler, Volkswagen (VW), BMW, Ford Europe, General Motors (GM) Europe, Renault, PSA (Peugeot-Citron), Fiat and Porsche are the well-known names from Europe. Most of these companies outsource their manufacturing to a number of small manufacturers. The emerging trend in the European market has been the decline in the motor vehicle production since the start of the new century. Consumer demand for cars has also shown a decreasing trend in Europe. European market also exports to the US and the Central and Eastern European countries. Vehicles are also imported from countries like Japan and South Korea. The slump in the European market is not expected to go. However, slow but gradual recovery is expected of the market. Emerging Markets It is expected that strong growth will continue in the Asian markets. Eastern Europe and South-east Asia market and specifically China are the markets to watch out for. Industry pundits are betting on these growing markets particularly China. Even Chinese-made vehicles are being exported all over the world. China and India then surely are the growth regions in the future due to rising sales figures. However, Japanese market is not expected to show any growth at all. "The new car industries springing up in China and India will account for most of tomorrow's extra production. As their output starts to reach markets around the world, the question is: which of today's big carmakers will be hurt the most Eventually the question could be an even tougher one: which will survive Other industries subjected to similar waves of new competition have seen dramatic shake-ups and the disappearance of famous names-personal computers offer a good example. Imagine General Motors (GM) stopping making Cadillacs and Chevrolets to concentrate only on SUVs and developing technology for others to use to make cars" (' The Global Car Industry', 2005). Porter's 5 Forces Analysis Threat of New Entrants: Entry barriers are huge in the automotive industry because huge investments are required. There were certain myths in the industry regarding the entry barriers like US industry and the three big firms of the industry are invincible. Now North American companies face stiff competition from foreign companies. We have witnessed that companies like Honda not only entered the market but also established their manufacturing options. Power of Suppliers: Suppliers have a very precarious position in the industry because most suppliers have traditionally been dependent on big manufacturers. This relationship if discontinued could disturb financial position of the suppliers and that is why they do not exert much power on the manufacturers. Power of Buyers: Previously buyers did not have much say or power over the product or its price. The automobile industry in America in particular saw changes when consumers started demanding foreign cars. Also as the competition increased different companies started offering different options for consumers. With different options buyers now regard the cars they drive as a vital expression of their lifestyle and are becoming ever more critical, which means that models have an increasingly short shelf life. This means that companies have to invest exorbitant amounts of money not just to develop new cars within ever shorter lead times, but also to ensure the lines that produce them are at the absolute cutting edge of efficiency and productivity. Availability of Substitutes: Bus, train, airplane, and other transportation modes available today can be considered substitutes for cars. Due to different factors like increasing fuel prices people may seek alternative transportation options. Environmental problem has also become an important issue because of which environmentalist lobby for different options. Car industry is going strong but there are definitely many options available to consumers today. Competitive Rivalry: Price-based competition has traditionally been absent in the automobile industry. Since there are few players in the industry so they realize that they do not compete on the basis of price. However, globalization has changed the competitive scenario today as businesses are not restricted to boundaries of a country or region. All companies are now vying for a global position and the competition is stiffer than ever before. Automobile industry is now an industry where the only certainty is that uncertainty will increase due to increasing competition. Competition between the global players has passed beyond the mere cut-throat to the downright savage. Due to a greater than before number of competitors from domestic and foreign markets automobile market has reached the maturity stage of the life cycle both locally and globally. BMW & Toyota Due to low potential for market growth in the car industry most companies aim for but high sales and profit potential. Western giants are the most unprofitable in the whole sector. There are companies like Toyota and BMW that are surviving due to completely different reasons. In an attempt to analyze these two companies, this paper carries out their analysis and suggests some strategies for their future. BMW Internal Analysis Premium Marketing: BMW stands for Bayerische Motoren Werke and is known as a luxury car manufacturer. BMW has been catering to the premium segment of the market with its premium brands BMW, MINI and Rolls-Royce. The volume segment of the automobile market has not been the target of BMW rather the company with focus on premium brands seeks to attain higher revenues per vehicle. So BMW has multibrands yet it is not catering to the mass markets. In premium segment BMW offers a complete range from the small car to the absolute luxury category. Within the luxury car segment the market is divided into traditional and functional luxury cars. In the area of traditional luxury cars American manufacturers like Cadillac dominate the market. Customers of traditional luxury cars go for comfort and appearance. In the area of functional cars European manufacturers like BMW are dominant. Customers of functional luxury cars give a lot of emphasis to functionalities like road performance, steering and suspension systems etc. Branding Strategy: BMW has high brand equity because of its high product quality and branding strategy. The branding strategy of BMW is to build the association of the brand name to the status. 'BMW Sheer driving pleasure' is their slogan which clearly shows that the brand strategy is to attach itself to emotions and feelings rather than attributes and features of the car. Considering their brand strategy, it seems that BMW does not explicitly associate itself to technological leadership. Some also criticize BMW for not being a global brand in this age of globalization. Product Expansion: BMW has also entered into product line expansion with a new zeal and offered numerous new models like BMW 6 Series Coup and Cabrio, the BMW X3, the BMW 5 Series Touring, the BMW 1 Series and the MINI Convertible. Product Development: Product development is also an important component of BMW's strategy. BMW is going to lead the industry in hydrogen cars with combustion engine capable of running either on hydrogen or on gasoline in order to deal with issue of the emission of CO2 and other harmful gases. Thus, BMW became the first car maker in the world to focus consistently on the medium- and long-term development of its cars on the use of hydrogen. With years of research and development, this initiative and commitment for energy efficiency will definitely give BMW the first movers' advantage in the industry. In order to make this project a reality BMW not only worked individually but also forged partnerships in the industry. Supplier Relationships: Collaborations with suppliers has been an important part of BMW's strategy. The management understands the crucial relationship with suppliers in managing costs and thus affecting overall profitability. "We have enhanced our management and direct approach of second and even third tier suppliers. Through electronic web-based platforms and early integration in the product development process we share information with second tier and even third tier suppliers. Our various sourcing strategies enable us to analyse and cluster the procurement market in a way to optimise purchasing activities in the long-run. For technically challenging components and innovations, we involve our suppliers already at a very early stage of the product development process. During the further development process we ask our suppliers to approach us with new ideas regarding development and manufacturing processes and re-designed parts and components" (Palmen, 2005). BMW Strategies BMW is going strong but in order to make it stronger following strategies are suggested: Focus Strategy: BMW has benefited in the past from its premium segment strategy and it has gained both in terms of both growth and profitability. This segment is expected to grow further in future. In fact it is expected that the growth in the premium segment would be greater than the mass market. With its focus on this segment while undertaking product expansion and development BMW can get benefits in the long run. Product Expansion: BMW Group should take further significant steps to expand its product range. The new products introduced by BMW have received positive feedback from the market. Market Development: BMW could keep strong focus on markets in the USA and Asia considering the potential these markets are showing. Global Presence: Global outlook can not simply be ignored by the group. Even if BMW concentrates on premium segment its three main brands have a lot of potential world wide. Even though the company has presence all over the world with its headquarters in Munich, Germany, the company is criticized for a narrow outlook. In the long run, it is the global outlook that would make or break brands and companies. BMW can not afford to narrow its focus on certain markets only. Toyota Internal Analysis Financial Position: Toyota is one of the financially strongest automobile companies in the world. In the scenario when even giants are losing their financial leverage, Toyota's financial position is its strength. "Toyota's strength can be seen more clearly in the amount of profits than in the number of cars manufactured and sold. Its final consolidated profits for the fiscal year 2003 (from April 2003 to March 2004) reached 1.162 trillion yen, making it the first Japanese company to earn more than a trillion yen in yearly profits. This amount comes to 12.5% of the final total profits of 1,784 listed companies in Japan and three to four times that of GM or Ford. While Toyota placed eighth in US economic magazine Fortune's sales ranking of world enterprises in 2003, it ranked fourth in the net global profit rankings of another economic magazine, Forbes's" (Fumio, 2005). Global Outlook: Toyota has expanded from its Japanese focus to a truly global outlook. Toyota has shown extraordinary growth among global auto manufacturers. Toyota has established its business in every part of the world. With production facilities in different parts of the world from Europe to China, makes it a true global player. In fact China is now considered a part of its top development strategy. Japanese market has become nearly saturated and in these conditions global expansion has helped Toyota tremendously. North American market is today Toyota's most important as it generates most of its profits from America alone. Realizing the potential of Russia Toyota is expanding its network of production bases there as well. Toyota has been late in Europe but it has also expand in Europe as the world's one of the biggest automakers. European market also became crucial for Toyota to cut its reliance on US sales for profit and falling Japanese demand. Production System: Production of Toyota-brand passenger cars rose in 2006. Toyota's production system is touted as its strength about which much has been written and said. The famous Japanese concept of Kaizen or continuous improvement has most actively been seen in Toyota factories. Partnerships & Relationships: Toyota has been pursuing a strategy to buy more parts abroad in order to cut production costs. For component Toyota dealt with Thailand and other Asian nations. The company believes in establishing strong relationships with its partner and prefers to have suppliers in the region. Another aspect of Toyota's strategies lies in consolidations & partnerships. Joint production of the Aygo with PSA Peugeot Citron in the Czech Republic and agreements and discussions with Fuji Heavy Industries are a clear sign of its strategies. Product Development & Multipurpose Vehicles: Toyota moved ahead in the realm of product development and focused on multipurpose vehicle. A multi-purpose vehicle is something that can fulfill consumers' varying needs like mobile office, delivery van, school bus, weekend car, dream vacation vehicle rolled into one. Toyota leads the industry in developing MPVs for just about every lifestyle and regional taste which makes Toyota a global company. Some of the recently launched brands of multi-purpose vehicle are Hilux standard cab, Hilux double cab, Hilux extra cab, Innova minivan, and the Fortuner SUV. These vehicles represent a global outlook of Toyota. "The IMV is a vehicle developed by a company that operates in 140 countries and knows every highway and byway in the world. It is a vehicle in which Toyota technology and know-how, gained from its worldwide sales and operations, has been fully utilized, said Mr. Yoshio Shirai, managing officer of Toyota Motor Corp. To develop these new vehicles, four points were met to set a global standard: a global package, advanced design, newly designed frame and suspension and high-performance engines. First, a basic size that would be welcomed by the customers all over the world was developed by establishing comfortable interior space for passengers and cargo. Second, the advanced design incorporated comfort and high-quality attention to detail typical of Toyota passenger cars" ('Toyota IMVs', 2005). Toyota Strategies Toyota as a company today has many strengths but like all other companies Toyota is not devoid of weaknesses. The ideal company always tries to overcome its weaknesses through different strategies. Some of the suggested strategies are: Strategic Management & Continuous Improvement: Toyota has been involved in a number of scandals recently. Scandals of tax evasion, criticisms of advertising campaign for a new car in China, exam scandal, policy of exploitation labor dispute at Toyota Philippines are some of the stories that made headlines. Toyota could face the management problem of becoming satisfied with successes and achievements. Many companies became trail blazers but once they became satiated they stopped blazing the trail lost their leadership position. Toyota as torch bearer of Kaizen should not forget its own strategy and should continue to improve. "Tomikawa, like other senior bosses at Toyota, is concerned about arrogance. He says he worries about the new, young, swaggering Toyota employees who have never experienced bad times and who seem to be comfortable with the idea that Toyota is just naturally superior to all the other auto makers. "This is a problem we must address in Toyota," says the hard-driving Tomikawa. Toyota, of course, is on a global roll. It is increasing its market share steadily, enjoys a remarkable degree of environmental cachet, its Lexus luxury car division is a leader in quality and has been for more than a decade and the corporate coffers are full with some $30-billion in cash and equivalent reserves, driven by profits such as the nearly $11-billion Toyota earned in fiscal 2003" (Cato, 2004). Environmental Focus: Toyota's goal is to become the world's leader in environmental technology. Toyota's future plans should include offering the hybrid option for all of its vehicles. Though increasing its production capacity and strengthening its development activities are part of their strategy yet others in the industry have made their successful moves first in this direction. Brand Building: Land Cruiser is Toyota's one of the most well known brands after Lexus which has achieved new heights in luxury cars. Due to its capabilities and price Land Cruiser has loyal following around the world. However, Toyota has not been able to build the equity of its brands the way some other names in the industry have done. Today Lexus and Land Cruisers are well known world wide yet long term brand building efforts and strategies are required to sustain the name of Toyota worldwide. Market Development: Toyota can continue on its market development in emerging markets like India & China. Western Europe is also an important market for the sales of Toyota and Lexus cars. In order to truly become global Toyota could improve its performance in Europe as it has already introduced diesel-powered versions of its Yaris, Avensis and Corolla models in response to its demand. References: Palmen, N. (May 2005). Steering BMW into the future: BMW Member of the Board of Management, Development and Purchasing, Dr Burkhard Goschel, talks to Nick Palmen of Automotive Industries about the road ahead. 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